'Mongrel' APRA to get tougher on banks

The financial services regulator is ready to "ratchet up the mongrel" and be tougher on banks to help address widespread misconduct.

Under its more aggressive approach, the Australian Prudential Regulation Authority may force banks to change the way they pay their senior executives to reduce the focus on financial results.

ARPA chairman Wayne Byres conceded the regulator should have called out inadequate remuneration practices at the Commonwealth Bank of Australia earlier, amid CBA's scandals in 2016.

APRA's team supervising CBA were aware of most of the issues identified in the regulator's later prudential inquiry, according to a June 2018 document revealed at the banking royal commission.

It referred to the supervision "mongrel" and the need for stronger support of the supervisory "gut feel".

The mongrel reference was inspired by parting words about rallying the troops from prudential inquiry panel chair and former APRA chairman John Laker after a meeting with the regulator's board.

Mr Byres said Dr Laker talked about the importance of APRA's supervision teams pursuing issues aggressively, even when the institution concerned was pushing back quite aggressively.

"The way I interpret that comment is simply that supervisors will be very ready to ratchet up the mongrel, so to speak, as long as it's clear that senior management will support them when they are being more aggressive in their approach," Mr Byres said on Thursday.

The royal commission heard an analyst in the CBA supervision team believed APRA could and should have called out inadequate remuneration practices at Australia's largest bank earlier, at least by late 2016.

Mr Byres agreed.

APRA did speak to a "pretty despondent" CBA board in December 2016, after shareholders delivered a so-called first strike against the bank's remuneration report that paid then CEO Ian Narev $12.3 million.

That was despite scandals involving CBA's wealth and CommInsure businesses.

Mr Byres said APRA did not believe there had been sufficient adjustment for the risk issues, but it did not push the issue harder as it lacked expertise in remuneration at the time.

He believes the prudential regulator will now have to step in and force banks to move away from their current remuneration systems that judge the performance of executives based heavily on financial metrics.

Mr Byres said the current structure of long-term incentives was particularly problematic and out of step with how best practices in remuneration were evolving internationally.

Progress from the larger institutions had been slow amid shareholder pressure to keep long-term incentives almost entirely determined by financial measures.

Mr Byres said regulatory intervention to mandate change was likely to be unavoidable.

"If I can be really blunt about it, I think what I am saying is to get change APRA will have to do it," he said on Thursday.

"I think the current frameworks are still too focused - although some banks are trying to move away, to give them credit - on performance equals profit and share price moves.

"Performance of an executive or an executive team is clearly more than those two things."